Dollar Falls as Bernanke Sees Slow Growth

Reuters

Thursday, 8 Nov 2007 | 2:04 PM ETReuters

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The dollar fell to near record lows against the euro Thursday, after Federal Reserve Chairman Ben Bernanke said U.S. economic growth would remain sluggish, supporting views for a December interest rate cut.

Speaking before a congressional panel, Bernanke said the housing market contraction appeared likely to become even more severe and the Fed expected growth to slow "noticeably" in the fourth quarter compared to the previous three-month period.

He also said the Fed -- the U.S. central bank -- saw growth being sluggish in the first part of 2008, with strengthening likely only as prospects for the housing sector improved.

"[Bernanke's] low growth tone has undermined the tone of the dollar during a time when traders are essentially looking for any reason to sell the dollar," said David Powell, a currency strategist at IDEAglobal in New York.

Analysts said Bernanke's comments had increased the chances of further monetary policy easing next month. This would reduce the yield appeal of dollar-denominated assets even more after the Fed slashed the federal funds rate target by three quarters of a percentage point to 4.50 percent since September.

The euro pushed to session highs at $1.4703 and was last trading at 1.4676, up 0.2 percent on the day. It touched a record high of $1.4730 Wednesday.

"The market is focusing on interest rate differentials, so we're seeing the dollar offered. From a trading perspective, euro-dollar could still touch 1.50 this year," said Dustin Reid, senior currency strategist at ABN Amro in Chicago.

Earlier, the dollar found a brief respite after the European Central Bank held interest rates steady at 4 percent and did not signal monetary policy tightening in December.

ECB President Jean-Claude Trichet warned against "brutal" currency market moves and said it had become even clearer that a strong dollar was in the United States' interests. He reiterated that the ECB stood ready to tackle inflation.

The dollar fell against the yen as U.S. stocks tumbled on Bernanke's downbeat growth assessment. The dollar traded down 0.2 percent at 112.62 yen, pushing away from session highs around 113.37.

The dollar's moves against the yen have become closely correlated to the stock markets, with the Japanese currency acting as a measure of risk appetite.

The dollar index, which measures its value against a basket of six major currencies, was down 0.3 percent at 75.403, off its record low of 75.077 recorded Wednesday.

The British pound scaled a new 26-year peak of $2.1117 versus the dollar after the Bank of England left interest rates on hold at 5.75 percent. Markets had been pricing in around a 1-in-3 chance of a surprise cut.

The return of risk aversion pushed high-yielding currencies such as the Australian and New Zealand dollars lower against the greenback. The Australian dollar retreated from near 24-year highs to last trade at US$0.9261, down 0.3 percent.

The kiwi slipped 0.3 percent to US$0.7753, while the dollar rose 0.6 percent to 93.44 Canadian cents.

U.S. short-term interest rate futures show an 82 percent implied chance the Fed will trim benchmark rates by a quarter point in December, up from 70 percent late on Wednesday.